Static Budget : Meaning, Importance, Benefits and More

A budget is a financial plan that outlines expected income and expenses over a certain period of time. A static budget is a fixed plan that does not take into account any changes in actual results. A variance is a difference between actual results and budgeted results. In this blog post, we will discuss the meaning, importance, and calculation of a static budget variance.





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Meaning of Static Budget Variance

A static budget variance is a difference between the actual results and budgeted results for a given period of time. The variance can be positive or negative, depending on whether the actual results are better or worse than the budgeted results. A positive variance indicates that actual results are better than the budgeted results. While a negative variance indicates that actual results are worse than the budgeted results.

What is a Static Budget? - Definition, Example, Process, Calculation, Formula

Definition of Static Budget

The static budget variance is a way for a company to see how much its budget at the start of a period differs from the final results. By comparing the two budgets, a business can understand how well it did and make adjustments for future periods.

So, it means “the company can figure out if they stayed on track with their budget or if they went over or under. This information can be useful for them to make better budget plans in the future.”

Importance of Static Budget Variance

Static budget variance is important because it helps organizations to check their performance. And identify areas where they need to improve. By comparing actual results to the budget, organizations can determine. If they are meeting their financial goals and can make adjustments as needed.

Static budget variance also helps organizations identify trends and patterns in their financial performance. For example, if a company has a negative variance in a particular area. It may state that there is a problem that needs to be address.

  • Helps check performance: Static budget variance helps organizations to check their performance and identify areas where they need to improve.

  • Allows for adjustments: By comparing actual results to the budget, organizations can determine if they are meeting their financial goals and can make adjustments as needed.

  • Identifies trends and patterns: Static budget variance also helps organizations to identify trends and patterns in their financial performance.

  • Problem identification: A consistent negative variance in a particular area may indicate that there is a problem that needs to be address.

  • Improves forecasting: By understanding the variances, companies can improve their forecasting and budgeting accuracy.

Calculation of Static Budget Variance

Static budget variance can be calculated by subtracting the budgeted amount from the actual amount. For example. If a company budgeted $100,000 for a particular expense and the actual expense was $110,000, the variance would be -$10,000 (actual amount – budgeted amount).

It’s also important to note that there are different types of variance that can be calculated, such as:

  • Flexible Budget Variance: This is the variance between the actual results and the budgeted results for the actual level of activity.

  • Sales Volume Variance: This is the variance between the actual results and the budgeted results for the actual level of sales.

  • Sales Mix Variance: This is the variance between the actual results and the budgeted results for the actual mix of products sold.

  • Sales Quantity Variance: This is the variance between the actual results and the budgeted results for the actual quantity of products sold.

Static budget variance formula

The formula used in the calculation of static budget variance is:

Static Budget Variance = Actual Amount – Budgeted Amount

For example, if a company budgeted $100,000 for a particular expense and the actual expense was $110,000, the variance would be -$10,000 (actual amount – budgeted amount)

Other formulas used in variance analysis are:

  • Flexible Budget Variance: it calculate by subtracting the flexible budget amount from the actual amount. 
  • Flexible Budget Variance = (Actual Amount – Flexible Budget Amount)

  • Sales Volume Variance: This is calculate by multiplying the budgeted sales price by the difference between the actual and budgeted quantity of sales. 
  • Sales Volume Variance = (Actual Quantity – Budgeted Quantity) x Budgeted Sales Price

  • Sales Mix Variance: This is calculate by multiplying the budgeted sales price by the difference between the actual and budgeted mix of products sold. 
  • Sales Mix Variance = (Actual Mix – Budgeted Mix) x Budgeted Sales Price

  • Sales Quantity Variance: This is calculate by multiplying the difference between the actual and budgeted price by the actual quantity of sales. 
  • Sales Quantity Variance = (Actual Price – Budgeted Price) x Actual Quantity

Example

A corporate app developer, XYZ, LLC, outlines a static budget for its operational costs. Item costs include data storage systems, software subscriptions, and employee payroll in the company’s static budget, and the company follows a quarterly budgetary period. XYZ may use the static budget to compare the difference between the actual revenue earned and a realistic budget goal. The values of each item XYZ records in the budget might include:

  • Design software: $10,000
  • Contractor fees: $25,000
  • Network subscription fees: $15,000
  • Cloud storage fees: $5,000

XYZ may expect a fixed cost of $55,000 for the quarter. The company can adjust the financial budget to reflect the actual costs throughout the budgetary period. For example, if one of the company’s contractors drops an app development project or the company needs an additional contractor. The company can’t change its fixed value. Even if XYZ earns $100,000 in sales revenue for its apps developed during the budgetary period. Its static budget may remain at $55,000. This means if the company incurs revenue loss, it still has a fixed amount of $55,000 for expenses.

Operational vs Static Budget

  • Operational budgets are plans for expenses and cost a business will take on as part of its daily operations.
  • Static budgets are similar, but they are fixed and do not change throughout the budget period.
  • The operational budget may change according to a company’s revenue and operational costs, but the static budget will remain the same.

  • A static budget, is set at the beginning of the budget period and it reflects the same value during the period.
  • The operational budget is adjustable to reflect any changes in the value of expenses.
  • The main difference between the two is that while operational budgets can change, static budgets stay the same no matter what happens.

Conclusion

In conclusion, a static budget variance is an important tool that can help organizations to check their performance. And identify areas because, where they need to improve. By comparing actual results to the budget, organizations can determine. If they are meeting their financial goals and can make adjustments as needed. Additionally, by understanding different types of variance, companies can have a better understanding of what’s affecting their financial performance and where improvements can be made.




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